Not down with OCC...

Barney Frank is introducing a bill to create a lamer version of the Consumer Financial Protection Agency than was originally proposed. It would exempt several non-bank institutions, such as automobile financing lenders and real estate brokers, from oversight. This is really sad because these are the types of lenders that have never been subject to federal oversight and which played a large part in getting us into this mess. Also, they won't require banks to offer traditional financial products in addition to more confusing and expensive "innovative" products. Boo.

Meanwhile, the OCC is spending government money lobbying against other parts of the government in an attempt to save itself from being shut down. After a decade of ignoring the abusive and risky practices of its regulated entities and their non-bank subsidiaries while aggressively trying to stop state attorneys general from enforcing state laws against the same, the OCC wants lawmakers to believe that it should be trusted to look out for consumers' best interests. More on this at Banking Law Prof Blog.

CFPA Roundup

The federal legislature has yet to take any action on the proposed Consumer Financial Protection Agency, which would protect consumers from dangerous financial products (like the Consumer Product Safety Commission that we have for toys, appliances, etc). (Click here for a video of Harvard Law Professor Elizabeth Warren, discussing the proposed agency which was, coincidentally, her idea).

The reason for the delay is that the large banks- with the help of billions of dollars of taxpayer money- are lobbying hard against the proposed agency. (see this Center for Responsible Lending rundown/debunking of the arguments that the financial services industry is using to oppose the consumer protection agency, which - unsurprisingly - require you to conveniently disregard the events of 2007 through the present).

The bank lobbyists are pleased to have the help of federal bank regulators in opposition to the agency. Because they've all done such a good job protecting consumers and they don't want another agency coming in (that would actually be focused on consumers AND have enforcement powers) to step on their toes. The Treasury Secretary is less than impressed.

Now, 24 State Attorneys General have entered the debate. They sent a letter to Congress urging the creation of a CFPA. Here's an exerpt:

"Maximizing compliance with these rules through enforcement by both federal and state officials will promote honest competition and reward compliant businesses, while deterring potential violators. Early detection and swift action to stop fraudulent practices can protect competitors from the pressure to adopt abusive but profitable practices before they spread in a race to the bottom. The availability of a nationwide network of enforcement agencies ready to take action, if necessary, will deter violators and encourage honest competitors who do not need to break rules to win customers."

What the letter doesn't really say is that the AG's have been getting sick and tired of federal regulators trying to prevent them from enforcing their state consumer protection laws. Instead it is very positive and forward-thinking. Maybe Congress will listen?

Another Glimmer of Hope

State Attorneys General won against national banks in a consumer protection case?

Amazing!

A federal agency's interpretation of a law that it administers was shot down under Chevron deference?

No way!

Scalia wrote the opinion?

Aaaa!

It's a big week.

Read Cuomo v. Clearinghouse Association here and a recap by SCOTUSBlOG here.

Presidential Address On Consumer Financial Protection Agency

Here's a link to the President's address on the Consumer Financial Protection Agency.


An excerpt:

"I welcome a debate about how we can make sure our regulations work for businesses and consumers. But what I will not accept – what I will vigorously oppose – are those who do not argue in good faith. Those who would defend the status quo at any cost. Those who put their narrow interests ahead of the interests of ordinary Americans. We’ve already begun to see special interests mobilizing against change. "

Who are the special interests that he refers to? U.S. PIRG's Consumer Blog names some names.

Is it time to be optimistic yet?

It's official, the Administration's Financial Regulatory Reform plan includes what consumer advocates have been referring to as a Financial Product Safety Commission.
It's the third point in the official plan available at this Treasury Website for the Regulatory Reform initiative or at financialstability.gov, and they're calling it a "Consumer Financial Protection Agency." Obama has been using Warren's exploding toaster/mortgage analogy (they can both cause you to lose your house!), so I wonder why the plan wouldn't adopt her corresponding Consumer Product Safety Commission/Financial Product Safety Commission analogy.

Anyway, the name is less important than the details of what this agency will do. That includes setting baseline standards for consumer financial products, such as verification of a borrower's ability to pay, banning methods of broker compensation that create an incentive to rip people off, and requiring that borrowers who qualify for prime products "opt out" before they are sold an "alternative" product. Most notably, the consumer protection standards set by the agency will be a floor, not a ceiling. That means that those states which go further to protect consumers won't be preempted by federal law.


Obviously, the banking industry is opposed to this. I have heard the Financial Services Roundtable and the American Bankers Association on NPR over the last couple of days saying that we don't need a new agency to protect consumers because lenders have an incentive to act in the consumers interest in order to protect the institution's reputation, and that imposing any standards on financial products will "stifle innovation." These arguments show that either: (1) the financial services industry has a very short memory, or (2) they are hoping Congress does.

Turning back to the plan- it gets even better! The OCC and OTS would be eliminated, so that banks won't be able to shop around for the regulator who will treat them the most favorably and aggressively shield them from the enforcement of state law.

It's a beautiful thing.

Financial Product Safety Commission

We regulate all other consumer products to protect consumer safety- toasters, cars, food and drugs. Why not financial products? A negatively amortizing exploding option ARM with a prepayment penalty can do as much damage to you and your family as an exploding toaster, if not more. The great idea for a Financial Product Safety Commission- championed by Harvard Law Professor (and head of the Congressional Oversight Panel for the bailout money) Elizabeth Warren- looks like it is starting to gain some ground! Check out the Washington Post article here.

Ex-employees of Wells Fargo come clean

For years, consumer advocates have been bringing attention to the problem of "reverse redlining"- the practice of steering people of color towards high-cost subprime loans when they qualify for more traditional or more affordable loan products.

The City of Baltimore's fair lending lawsuit against Wells Fargo has produced some interesting affidavits from former employees of Wells Fargo. The former employees talk about the tactics used to encourage people of color to choose subprime or no-documentation loan products; the practice of loan officers falsifying loan applications to put borrowers into certain products; the practice of targeting borrowers through Black churches, and outright use of racial slurs around the office.

Read about it at the New York Times, Baltimore Sun, or Public Citizen's Consumer Law and Policy blog.

It is worth noting that state attorneys general may have been able to investigate and uncover lending discrimination by Wells Fargo if not for the Office of the Comptroller of Currency's aggressive assertion of preemption (the OCC opposes any state attempt to investigate the books of a national bank or its operating subsidiary.)

Despite Numerous Compromises, the Cramdown Bill Isn't Moving

Here's the latest on Federal legislation that would remove the exception in the bankruptcy code that prevents judges from treating home mortgages on a borrower's principal residence like other secured debts- for a limited time, on only those mortgages that were originated before 2009, and only for loans under a certain dollar amount (to list a few of the limitations that have already been agreed upon by the bill's sponsors). There is no principaled argument against this legislation: it's not going to increase the cost of real estate in the future, lenders aren't going to get any less from the borrower than they would otherwise, and there are already incentives and allowances in the administration's housing plan to facilitate voluntary modifications so that people can avoid bankruptcy. What is the deal?

Don't Forget About the Renters

The NY Times has this article today about renters in foreclosure. When a rental property is sold in foreclosure, tenants are often evicted (subject to certain timelines and notice requirements that might be imposed by state law). This article describes Fannie Mae's policy of continuing to rent to paying tenants until the property is sold. This makes sense, because it provides a stream of revenue for the bank and it also keeps the property occupied. Why don't other banks do this when they aren't required to by state law?

Elizabeth Warren on the Daily Show

OMG.

Part 1


Part 2

Cramdown Legislation Stalling in the Senate

NPR published a story today on the legislation that would allow bankruptcy judges to restructure loans on a borrower's primary residence. The article does a pretty good job of explaining how a loan would be restructured and points out that the bankruptcy judge would use his or her discretion to determine whether a modification was warranted under the circumstances of an individual case. What it doesn't mention, though, is that the legislation that passed in the House would only apply to loans originated prior to this year. The industry criticism, cited at the end of the article, that the legislation would scare lenders and raise interest rates just isn't credible when future (and current!) loans will not be affected. It isn't clear what the real dispute is, and what sort of "compromise" may be in the works for the Senate version.

The need for credit rating agency reform

The New York Times published an interesting article today, and an Op-ed yesterday raising the question of how the credit rating system can be improved to avoid the problem of over-inflated ratings, which helped cause the current recession. The NYT article asks why Warren Buffet hasn't spoken up about credit rating agency reform- considering that he is normally vocal about his views on the causes of the financial crisis and its potential solutions and his company owns 20% of Moody's. That company, along with Standard and Poor's, has been criticized for its role in fraudulently inflating the credit ratings of mortgage backed securities.

I like this analogy that Frank Partony, a University of San Diego Law Professor, used to explain the role of credit rating agencies in the housing market collapse:

“Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not . . . If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise.”

The rating agencies have been mislabeling the goods for a long time. “A lot of investors have been eating pork recently,. . . and they’re not too happy about it.”

Hopefully as Congress overhauls the federal financial regulatory scheme, this important piece of the puzzle will not be left out.

Housing Plan Moves Forward

The House passed the cramdown bill, which would allow bankruptcy judges to treat mortgages on a primary residence the same way they treat all other secured loans (except that it will only apply to loans made before January 1 2009).

Maybe this will add some teeth to Obama's plan to encourage voluntary loan modifications and reduce foreclosures.

Cramdown

The Hill reports that the House of Representatives has delayed a vote on legislation that would allow bankruptcy judges to modify mortgages on a borrower's home. It seems that lawmakers are feeling the pressure from mortgage lenders to wait and see how voluntary loan modifications work before amending the bankruptcy code. My thoughts are that this change is bound to happen eventually, and will be able to prevent more foreclosures the sooner that it is implemented.

I'm not sure what the latest news is on a proposed amendment by Illinois Representative Biggert that would limit access to the bankruptcy courts for immigrants other than citizens and green card holders. There is a brief description of the amendment on the Fair Immigration Reform Movement blog. It doesn't seem to be getting much press coverage- hopefully this means that its not being taken seriously by other lawmakers.

Obama Plan

Information about the Obama administration's Homeowner Affordability and Stability Plan has been released.

The plan provides for lower-cost refinancing loans through Fannie Mae and Freddie Mac, and a better loan modification program. However, while the plan will create incentives for lenders and servicers to cooperate with borrowers to arrive at loan modifications, it will still be voluntary.

The best part of the plan will require action by Congress- to amend the bankruptcy code to allow judicial modification of mortgages on a borrower's primary residence.

2.4 Million Foreclosures in 2009?

The Center for Responsible Lending estimates that over 279,000 mortgages have foreclosed in 2009 and that the number will reach 2.4 million.

Their website allows you to view foreclosure rates by state.

Happily, the Office of Thrift Supervision (OTS) has apparently asked for a moratorium on foreclosures until the government can implement a loan modification program.

CRL recommends policies that will allow courts to modify mortgage loans.

Currently, the bankruptcy code does not permit judges to modify loans secured by a debtor's principal residence. Though judges do have the discretion to modify or "cram down" a loan secured by a car- or, say, a summer home.

Wayne County Michigan Sheriff Refuses to Foreclose Homes

The Detroit Free Press reports that Warren Evans, the Sheriff of Wayne County Michigan (home to Detroit) has refused to conduct any more foreclosures until the Federal Government does all that they can to help keep people in their homes.

Sheriff Evans argues that Michigan foreclosure law is preempted by the federal Troubled Assets Relief Program (created by the bailout bill), which requires the Secretary of the Treasury to implement a program to encourage loan modifications. He says:

"I cannot in clear conscience allow any more families to lose their homes through foreclosure sale until I'm satisfied they have been afforded every option they are entitled to under the law to avoid foreclosure," he said.

Sheriff Evans has encouraged his fellow sheriffs in distressed communities around the country to follow suit. If sheriffs around the country refused to conduct a foreclosure sale or evict a homeowner until ordered to do so by a court, maybe lenders would start to ask whether it is worth the trouble and might actually start negotiating with borrowers.

Big Surpise

The bailout bill's halfhearted attempt to address the consumer side of the economic crisis- the "Hope for Homeowners" program- hasn't actually helped many homeowners. NPR reports that only 25 loans through the program have closed since October. Meanwhile...

National Community Reinvestment Coalition files complaint against Standard & Poor's

The National Community Reinvestment Coalition recently filed a complaint with HUD's office of Fair Housing and Equal Opportunity against credit rating agency Standard & Poor's. You can find the press release, along with NCRC's complaint and exhibits, here

NCRC's complaint alleges violations of sections 804 and 805 of the Fair Housing Act, which have both been interpreted by courts to forbid discrimination in mortgage lending. NCRC Complaint at 3, 6-7 (Jan, 2008). S&P and other credit rating agencies have come under fire for inflating the ratings of securities backed by subprime loans. Investors purchased mortgage-backed securities based on these inflated ratings, which created an incentive for mortgage originators to sell more subprime loans. Studies show that subprime loans were disproportionately targeted towards Borrowers of Color, including those who would have qualified for prime credit. See Debbie Gruenstein et al, Center for Responsible Lending, Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages 10-12, 16 (2006); Institute on Race and Poverty (IRP), Draft Report, Communities in Crisis: Race and Mortgage Lending in the Twin Cities 2 (2008). Credit rating agencies like S&P are potentially liable under the Fair Housing Act for the role that they play in creating financial incentives for lending discrimination.

It will be interesting to see how aggressively the new HUD will enforce fair lending complaints. The Fair Housing Act provides the agency with a wide range of enforcement tools to remedy the effects of past discrimination. It would be a nice change if they ask for more than a court order telling S&P to stop breaking the law.